China Translated

The credit crisis and the fall in oil prices have proved a double blow for energy suppliers - they face falling prices for their product and no credit to tide them over till prices rise.  In an article published today by the EIU’s Business China, I argue that for energy hungry China, this is an opportunity to pick up energy assets that were previously not on the market, shoring up supply for their energy intensive industrial sector.

The recent deal between Russia and China - a $25bn loan from China in return for 15m tonnes of crude oil a year for 20 years demonstrates the dynamics of the situation.

In the course of writing the story I interviewed Nick Pennell, the head of the energy practice at Booz & Company.  His view is that it is the independent oil companies whose price has fallen most steeply and who will be the most likely targets for aquisition by China’s National Oil Companies (NOCs).

I also interviewed Erica Downs of Brookings, who pointed out that concerns about a zero sum competition to tie up the world’s oil supplies are misplaced.  First, much of China’s overseas oil is pumped from assets overlooked by the oil majors.  Exploiting these assets means less of a drain on reserves in Saudi Arabia and elsewhere.  Second, much of the oil China pumps oversas is sold onto global markets rather than shipped home.  Oil from China’s wells in Ecuador, for example, is mainly sold to the US.

From this point of view, China’s NOCs’ overseas activities are contributing to global security of supply rather than syphoning off oil that would otherwise find its way to the West.  Incidentally, some of Erica’s very informative papers on China’s energy sector can be seen online here.

Finally, I interviewed David Fridley of the China Energy Group. He pointed out that the global economic slowdown had reduced energy demand with prices falling from a peak of $145/barrel in June 2008 to about $40/barrel today, but the credit crisis also means there is no investment in expanding supply.  That means that when demand kicks back in prices will go right back up to $100+ and oil suppliers will once again be in a sellers market.  From this point of view China’s NOCs have a rapidly closing window of opportunity to do as many deals as they can.

You can purchase the complete article from the EIU’s online store here.

Energy, Financial Crisis, Industry, US-China Relations

Hilary Clinton’s remark that the USA and China are in the same boat and have to row together inspired Southern Weekend to interview several Chinese economists on how they think China and the USA should address the current crisis.  It’s difficult to know how representative the views of these economists are, but they make for interesting reading.

Two main take aways for me.  First, in the short term China wants hard technology not more holdings of US government debt if it is to finance the US recovery.  Second, deep suspicion of the Bretton Woods system and a desire to move away from the dollar as the international reserve currency.

Xia Bin of the the State Council development research center draws an analogy between the US and a family that despite its limited income, borrowed money to gamble, and lost.  What should such a family do?  First, they need to borrow money to repay their debt.  Next, they need to economise on food, accommodation, and clothing.  Finally, perhaps they have some antiques or valuable paintings?  They should sell them to repay the debt.

Xia Bin notes that the US has 8000 tonnes of gold and lots of advanced technology.  The US recovery can’t be financed by more debt - they will have to face the real cost of their actions and part with their valued possessions.

Xia believes it is the structure of the global financial system, with the dollar as the international reserve currency, that is the root cause of the current crisis.  The US is unable to resist the temptation to spend beyond its means, knowing that other countries have no choice but to hold dollars and so it will be able to inflate away its debt and never have to face the true cost of its actions.

Xia suggests that the US be restricted to a current account deficit of 2-3% of GDP (currently it is around 6% of GDP).

Xiang Songzuo of the Central China Science and Technology University thinks that China expanding domestic demand is a major contribution to the world recovery.  Xiang thinks the USA is terrified China will dump its holdings of dollar denominated debt, and suggests China can use this to exert pressure.

First, China should insist that the US stop pressuring them to increase the value of the RMB, second the US should abandon its protectionist policies, third, the US should permit China to buy its high technology products and patents.  ‘In the past, we gave them products and all we got back was paper’, says Xiang, ‘now we want real things.’

Yu Qiao of Tsinghua University notes that the US is solving its short term problems by printing money.  In the end this will mean a weaker dollar.  He has an ingenious suggestion for dealing with the risk China faces from its enormous holdings of dollar debt.  He suggests securitising the debt, providing a buffer for China against the risk of a fall in the value of the dollar, whilst avoiding the risks to the US and to the global economy that would follow from a rapid sell off of China’s dollar holdings.

Zhang Li of the Central China Finance University believes that China cannot rely on imports and should take steps to boost internal demand.  Taking account of the need to rebalance the economy, the economic stimulus should not simply focus on infrastructure but should also cover social insurance, health care, and the development of the services sector.

Zhang also notes that with inflation very low now is also a good time to introduce market orientated reforms (presumably to areas where price controls remain?).  To protect exporters the RMB should not be allowed to appreciate, but to support trade partners it should not be allowed to depreciate.  When the crisis is past, the RMB should return to the path of steady gradual appreciation.

Regarding the US, Zhang believes they should relax their restrictions on the export of high technology goods.  He also notes that they should limit the expansion of their money supply - avoiding the temptation to inflate away their debt; and strengthen regulation of their financial system.

Zhang Yansheng of the National Development and Reform Commission agrees with his State Council colleague Xia Bin, the problem is the Bretton Woods system and the dollar as the international reserve currency.

Finally, Xiao Geng of Tsinghua University has a suggestion for reform of the world financial system.  First, as China and Japan are the main lending nations and the US the main borrower, the central banks of Japan, China and the USA should construct an ‘emergency currency stability system’ to ensure the stability of the yen, yuan, and dollar.  Second, there should be a global alliance of central banks, with the US, Japan, China, and probably the ECB involved - they would co-ordinate monetary policies and become the international lender of last resort.  This alliance of central banks would also regulate global financial markets and resolve crisis.

So there we are, we might all be in the same boat, Hilary, but if you want to get out the other side of the river you had best give me all your gold and all your technology.

You can see the complete article in Chinese here.

EU-China Relations, Financial Crisis, Monetary Policy, US-China Relations

In the course of updating the EIU’s city guide to Tianjin I came across a few interesting facts and figures, many of them related to the port and airport.

On the port, it seems like there are serious plans to increase the capacity to import raw materials - especially iron ore and crude oil.  CNOOCs plans to manufacture deep sea mining equipment in the area also underlines the role of Tianjin in meeting China’s future energy needs.

On the airplanes, assembly of the Airbus A320 appears to have catalysed the region’s aviation industry with plans to develop an indigenous helicopter.  Meanwhile the local government has bought itself a share in an airline, hoping to make Tianjin a nexus point for flying businessmen.

Tianjin port signed an agreement with China Marine Bunker (a subsidiary of PetroChina) who will invest Rmb220m in the development of fresh water and oil docks at the port.  In another port development, Cosco (Hong Kong) are investing Rmb300m in a special dock to handle iron ore, aiming for handling capacity of 23m tonnes a year.  Sinpoec, meanwhile are teaming up with the port to develop a dock for the handling of crude oil, with plans for an annual handling capacity of 20m tonnes that would make it the biggest in China.

Staying with oil, CNOOC plan to locate their core production facility in Tianjin, with total investment of Rmb22bn.  CNOOC will locate management and research functions, and the manufacture of deep sea mining equipment in the facility.

On airplanes: Tianjin is the location for the assembly of the Airbus A320, apparently plans are on schedule, and the first plans will be ready for testing in May of this year.  In other aircraft related news, Aviation Industry Corporation of China and the Tianjin government agreed a joint investment in the Binhai New area to build helicopters - with plans to start with parts in 2009 and build complete helicopters by 2011.

Finally on the aircraft front, Tianjin government joined others in making a major investment in one of China’s crisis wracked airline companies - with a Rmb500m investment in Hainan airlines.  Unlike previous beneficiaries of government generosity Southern Air and Eastern Air, Hainan Air is a private company.  The government apparently wants them to make Tianjin the nexus of all their routes - making it easier for businesses to fly to the city.

If anyone is interested in seeing Tianjin’s 2008 economic report and plans for 2009 they can see it, in Chinese, here.

Energy, Industry, Infrastructure, Regional

January’s extraordinary loan growth might have increased household savings and poured funds into the stock market.

By chief economist Shen Minggao and economist He Yin

From Caijing Online

The 1.6 trillion yuan that Chinese banks lent in January comes as a shock. It is as much as one third of the loans granted in 2008.

Once the shock subsides, your next thought is, ‘Well, no wonder.’ The central bank lifted the credit cap last year, enabling banks to lend as much as they want. Add on that banks suspect profit margins for loans will narrow if the central bank continues to cut interest rates and you have the beginnings of an answer. Right now, it’s in the interests of banks to grant as many loans as they can before rates get cut again.

It is also worth noting that over 600 billion of the new “loans” were actually commercial papers. Banks seem to have raced to expand their credit business before the government tightens controls again. Thus, they bought as much commercial paper as possible, which is easier than originating loans.

But, where have the loans gone? They might go in three directions: toward deposit accounts where they sit, toward business investments, or toward equity markets where they’re used to buy stocks. It looks like the latter option may have absorbed a fair share of the new liquidity.

When companies get a loan, they can put a portion of the money in their business accounts, use a portion to raise capital and buy bonds, and keep the rest in hand for immediate uses. Deducting the amount money that went into these four outlets, there was still 830 billion yuan of the January loans that cannot be explained – that’s 500 to 600 billion more yuan compared to the previous two years. This chunk of untracked money probably found its way into the stock market, awaiting the rebound of share prices.

We found strong correlation of 0.66 between the unexplainable part of increased loans and the price hike of Shanghai stock index in the last three years.

Deposit accounts also seem to have housed a large portion of the new loans. The deposit balance rose a surprising 1.53 trillion yuan in January, 60 percent more than last February in which 2008’s Spring Festival fell. This exceptional increase in savings cannot be explained by an increase of income; the average household income grew more slowly in 2008 than in 2007. Nor does decreased consumption account for deposit growth; retail sales slowed down since last fall, but large-scale consumption has not changed drastically. Loans for the housing market likewise stayed near the same level as last year, and foreign currency deposit decreased only marginally, meaning that most of the money didn’t come from exchanged foreign currencies.

So odds are that the deposit balloon was a result of the loan expansion. It is possible that companies paid back-wages to the workers once they finally got a loan, or they paid back their debt to other companies, who in turn paid back-wages. Households may also have sold their stocks for cash while the companies invested with their loans. Individual investors might have turned away from investing and saved more in their deposit account. And some companies might have sold commercial papers and placed part of the money in private accounts for interest arbitrage.

Lastly, some companies might have invested their loans in fixed assets. Considering the extraordinarily large amount of credit given in January, other sources of private funding might have been squeezed. As a matter of fact, over 90 percent of fixed investment in the first two months of each year are made by state-owned or state-held enterprises, which largely rely on bank loans to finance their investments. This means it’s possible bank loans paid for all fixed investments in January.

Thanks to Steve Dickinson, co-author of the China Law Blog for passing the story on to me.

Financial Crisis, Monetary Policy

The mayor of Shenzhen reportedly said recently that in a time of crisis strong government was a necessity.  This sparked an opinion piece in Southern Weekend making the point that sensible government is also be a good thing.  The author whose pen name translates as ‘Smiling Sichuan’ makes two main points:

In an increasingly complex society government has to make decisions balancing different interests, for example on the environment, land use, traffic planning.  Making these type of decisions, the old style of command and control decision making doesn’t work.  You need a type of decision making which is softer and more deliberative.

No one disagrees that we need strong government, but we also need to consider what makes government strong.  The key to authority is that authority is accepted by the people over whom it is exercised.  In the case of government, the government’s authority will find greater acceptance if the government itself accepts the rule of law.  And that acceptance can’t just be written on a piece of paper, it has to be realized in the actions of the government.

You can see the article in Chinese here.

Social Policy

In December 2008 the ever helpful Caijing polled 459 companies in Guangdong, Shandong, Jiangsu, Hebei, and some central and western provinces on their views on the economic slowdown and the government’s Rmb4trn rescue package.

The main takeaways for me were on the Rmb4trn rescue package (the survey makes clear that different sectors will see different impacts - with construction and machinery sectors the most optimistic), and on firms’ investment plans (more than 50% of respondents have no plan for investment in the next two years).

The surveyed companies had an average employee count of 1700 and average sales of Rmb1.3bn in 2007.

The main findings from the survey are:

The companies anticipated that the economic slowdown would impact other firms in their sector through slower sales (77.3%), higher stocks (37.9%), staff cuts (32.9%) and bankruptcy (22.4%).

Breaking these results down by sector: respondents in the construction sector were most likely to anticipate increased stocks, the electrical goods sector the most likely to foresee staff cuts, and light industry the most likely to foresee bankruptcies.

The majority of respondents expected to see slight or marked falls in prices of key products (57%), earnings from sales (58%), profitability (59.6%) and exports and export orders (67.9%).

State Owned Enterprises (SOEs) and private sector companies had seen a differential increase in accounts receivable and accounts payable.  SOEs were most likely to have seen an increase in accounts payable (45.9%).  Private companies were most likely to have seen an increase in accounts receivable (42%).

Different types of company were also having a different experience of operating revenue and credit availability.  More than 50% of both state owned and private enterprises reported pressure on their operating revenue but slightly more SOEs reported difficulty in getting credit (50%) than private enterprises (42%).

There was a correlation between companies seeing weaker profitability and companies experiencing cash flow and credit problems.  60.1% of firms with falling sales and profitability also had cash flow problems, compared to 36.6% with stable sales.  47.8% of firms with falling sales and profitability reported difficulty obtaining credit, compared to 33.9% of those with stable sales.

Regarding the Rmb4trn rescue package, 42.2% of respondents expected to see a direct impact on demand for their company’s goods, 37.8% expected it to help them improve their technology, 22.1% did not anticipate an impact, and 18% expected it to drive higher levels of investment for their firm.

SOEs were the most optimistic about the rescue package, with 57.3% expecting to see demand in their sector increase, compared to 40.6% of private companies.

On a sectoral breakdown, there was a mixed view of the impact of the rescue package on demand.  The most optimistic were companies in the construction sector (68% anticipated higher demand), followed by machinery (59%), light industry (48%), steel (47%), electrical goods (28%), and textiles (22%).  Views on whether the rescue package would drive higher levels of investment were more similar with most sectors showing between 20%-30% of respondents believed there would be higher investment in their sector.  The big exception was steel (14%) and electrical goods (3%) where the view was more pessimistic.

Only 8.5% of respondents anticipated starting investment projects in the next 3 months, 9% in the next 6 months, 22.7% inside a year, 9% inside 2 years, and 50.6% with no plan or not yet clear on the question.

Regarding staffing numbers, more than 50% of respondents expected stability in staffing numbers on both a 1 and 2 year time horizon, about 15% expected a slight increase, and about 25% expected a slight decrease in staff numbers.

You can see the complete survey in Chinese here.

Financial Crisis, Industry

Continuing the theme of unemployment in the Yangtze River Delta, Southern Weekend have a piece on the problems facing migrant workers in Kunshan - which is very near Shanghai.  This is a rough translation of the main points.

Finding work is hard, finding workers is also hard

The 17 and 18 year olds who have come to Kunshan looking for work have no home and no family to rely on.  How long they stay before they find work or go home depends on how much money they have in their pockets.

On the 8th February 2009, 22 year old Dong Chunfu has taken the afternoon off work to take his two female cousins to the train station, they are returning to their home town in Shandong.  In the last week, Dong has taken a lot of days of work to accompany his cousins as they search for work. With little work at his factory, taking time off has not been a problem.  ‘We found work but they didn’t want to do it’ Dong complains.  ‘You call that work?’ his cousin replies.

Dong is a little bit embarrased: ‘the salary was a bit low, but if you worked overtime everyday it would be roughly the same as what it was last year’ he says.  ‘It’s not like you came here for a holiday’ he adds.

Nearby, Wang Lijun is taking charge of 7 if his nieces and nephews, the youngest is 15 years old and has not yet graduated from high school.  They traveled from Henan to Kunshan on the promise of work from one of Wang’s friends, who said he needed extra hands for his factory.  On arrival, however, they discovered that the factory was an iron-works, only paying Rmb700/month, and only hiring men.  With nearby factories paying even less, Wang and his charges have no choice but to make the journey back to Henan.

Zhang Qi is also from Henan and also headed home.  A week ago she gave an employment agent in her home town Rmb700 on the promise of a factory job in Kunshan.  But after 1 day in the factory she was made redundant.  The employment agent now claims that the Rmb700 was all given to the local labour bureau, and, even though he is lying, Zhang Qi has no way of getting it back.

Recalling her one day at the factory Zhang Qi says: ‘The work was hard and the wages were low.’  Adding insult to injury, the factory owner had a water fountain with a sign saying ‘one cup = Rmb1′ next to it.  ‘Why didn’t he just say ‘no drinking” says Zhang.

Zhang’s case is not an isolated example, the Southern Weekly journalist met many people with similar stories.  The sad thing is that many of these migrant workers did not just come to the Yangtze River Delta to work, they also planned to settle down, and slowly move their home and their family to the region.  That now seems like a distant prospect.

In Changshu, Guo Xiping is sweeping the road in the ‘Health Village’ section of the Changshu Science and Technology Park.  Seeing a recruitment advert for a local electrical goods factory he reflects: ‘a year ago I worked in a similar factory, now if I want to work their again I have to pay an agent’s fee of Rmb400 just to get an interview, and then the job isn’t guaranteed’.

Guo lives in one such agent’s dormitory.  It costs Rmb10/night and Guo can’t remember how long he has been there.  He only remembers that when he arrived he had Rmb1000, now he only has a few coins.  When he runs out of money he plans to borrow from a fellow townsman for the journey home.

According to statistics from Kunshan labour bureau, the number of people employed in the town has actually gone up in January.  The journalist’s investigations point in the same direction: the problem is not there is no work, the problem is that the quality of work available is too low.

Gansu native Wang Yao and her boyfriend have also come to Kunshan looking for work.  They are looking at advertisements and weighing their options: ‘This factory is close, but they don’t employ people from Gansu; this factory has regular hours, and you get meals and lodging, but the pay is Rmb0.5/hour less than lots of other places - that’s a lot over the course of a month; this factory is quite relaxed, and its clean, but its a long way away.’

An employment agent interrupts Wang’s deliberations.  ‘What are you waiting for’ he says, ‘they are all pretty much the same, all Taiwanese factory owners are equally bad, either the wages are low but you get food, or the wages are high, but they fine you and charge you for every little thing.’  Wang heaves a sigh and she and her boyfriend wander off.

In the same area, another agent is half threatening half cajoling a young girl.  The girl is nervously kneading a corner of her clothes. ‘What are you waiting for’ the agent says ‘today is the last day to enroll, and I’m driving to the factory at 11.’  The girl doesn’t say anything, she wanders off.  A few minutes later she is back with the agent’s Rmb280 introduction fee.  Another Rmb1 buys her the pen she needs for the interview.

You can see the complete article in Chinese here.

Financial Crisis, Labour markets, Regional

Hilary Clinton arrives in Beijing today.  I have an op-ed on the visit published on the WSJ China web site today.  The main points are:

There is a lack of clarity about the Obama administration’s view on the trade relationship - first Obama and Geithner say China is manipulating the currency, then Geithner says China is a ‘force for stability’ in the world.

There is also uncertainty about the place of trade in the bilateral relationship.  Under Bush the Strategic Economic Dialogue moved to center stage as the main forum for bilateral relations.  Hilary has indicated that trade will take its place amongst a broader set of issues - strategic, environmental, maybe human rights.  But no word yet on what the institutional form for the dialogue will look like.

Whatever answers to these questions Hilary brings, the balance of power in the relationship is shifting in Beijing’s favour.  One of the main reasons for this is China’s enormous holdings of US$ denominated debt.  Though it would be impossible for China to sell its US$ debt without doing serious damage to its own economy, its capacity to finance the US recovery will be an important bargaining chip in trade negotiations, as China works to keep US markets open to its goods.

That said, as January’s precipitate decline in export growth shows, China cannot rely on external demand to bring the economy back to a path of rapid steady growth.  The solution to China’s current economic woes is not in this or that trading relationship with the US, but rather in rebalancing the economy toward domestic demand.

You can see the article on the WSJ website (in Chinese) here.

Financial Crisis, US-China Relations

The USA’s new Secretary of State Hilary Clinton will arrive in Beijing on Friday for the final leg of her trip through Japan, Indonesia, S.Korea, and China.  This is an extract from an article she published in Foreign Affairs in Nov/Dec 2007:

“Our relationship with China will be the most important bilateral relationship in the world in this century. The United States and China have vastly different values and political systems, yet even though we disagree profoundly on issues ranging from trade to human rights, religious freedom, labor practices, and Tibet, there is much that the United States and China can and must accomplish together. China’s support was important in reaching a deal to disable North Korea’s nuclear facilities. We should build on this framework to establish a Northeast Asian security regime.

But China’s rise is also creating new challenges. The Chinese have finally begun to realize that their rapid economic growth is coming at a tremendous environmental price. The United States should undertake a joint program with China and Japan to develop new clean-energy sources, promote greater energy efficiency, and combat climate change. This program would be part of an overall energy policy that would require a dramatic reduction in U.S. dependence on foreign oil.

We must persuade China to join global institutions and support international rules by building on areas where our interests converge and working to narrow our differences. Although the United States must stand ready to challenge China when its conduct is at odds with U.S. vital interests, we should work for a cooperative future.”

You can see the complete article here.

US-China Relations

Shandong is one of the main centers for agriculture and heavy industry in China, with strong links to nearby South Korea making Qingdao an important port, and a cluster of home electronics brands, including Haier, contributing to the development of a more innovative manufacturing sector.

In the course of updating the EIU’s guide to the province I looked at a few recent articles in the Chinese business press and also the provincial government’s own report on the economy in 2008, which you can see in Chinese here.

The main points of interest were in relation to Shandong’s response to the economic slowdown.  The provincial government has announced plans for a stunning Rmb1.6trn in investment, apparently much of it over the course of 2009.  You can see a Caijing article on the subject here.  As with the central government’s own Rmb4trn rescue package it is not clear how much of the money will come from the provincial government, how much is commitments imposed on lower levels of government, and how is new spending.

A lot of that investment is targeted at infrastructure.  In shipping, the government will invest Rmb53bn to increase port handling capacity of 620m tonnes a year by 2010 (currently they are at 500m tonnes).  The government will also invest Rmb150bn in the railway network over the next 8 years.
With Shandong’s steel sector, and associated industries, feeling the effects of the slowdown in demand, restructuring of the industrial sector continues.  In coking coal, 22 local companies plan to collaborate on the development of the world’s largest coking coal facility, partly to counter the risks associated with wild price movements they have seen in the last year (In August 2008 coking coal fetched Rmb2700/tonne, one month later it was down to Rmb1700 tonne and production had halved).  With 80% of the provinces energy supplied by thermal coal, and power shortages in Spring 2008 as well as around the Olympics, the government plans a 50m tonne reserve to stabilise prices and provide an emergency source of supply.

Finally, Shandong is China’s biggest agricultural province.  Agriculture faces twin challenges in the form of a drought affecting some 20m mu of crops, and a virus afflicting a third of the province’s duck population, which apparently lowers the ducks’ immune system and makes them more vulnerable to other diseases.  Still reeling from the after effects of the melanine scandal, the province is also introducing a rigorous system for controlling food processing.  All food manufacturers must record with local government the type, quantity, and purpose of all additives they use.  Violators could have their production license revoked.

Agriculture, Financial Crisis, Industry, Regional